What is funeral insurance?

Funeral insurance is a policy that will give your family a lump
sum payment to help pay for funeral and associated expenses when
you die.

How does funeral insurance
work?

You pay monthly or fortnightly premiums (ongoing payments) for a
fixed amount of cover. Usually you can choose between $5,000 to
$15,000 cover which will be paid to your beneficiary when you
die.

Smart tip

Not all funeral insurance plans are the same. Some plans will
let you stop paying your premiums once you have reached the amount
you need for your funeral. Shop around for and compare funeral
insurance quotes before you sign up.

With funeral insurance, you are not saving for funeral costs but
buying insurance to meet those costs at some future date.

Unlike taking out insurance for a car accident which is an
unknown event, we all know that we will die sometime. Because you
don't know when you are going to die, you need to think about
whether you can afford to pay premiums for funeral insurance for
the next 10, 20 or more years.

Funeral insurance premiums increase over time

Not only will you need to keep making payments over the years,
but premiums are usually 'stepped' which means they increase with
age and grow over time.

Funeral insurance premiums tend to rise steeply for people over
50 and this can cause people to cancel their policy in the first
few years, losing the benefit of premiums already paid.

If the premium payments become unaffordable and you stop paying
them, your policy is likely to be cancelled. You will not get back
the money that you have paid towards your policy. Different
insurers have different rules, so read the PDS carefully before you sign up.

Read ASIC's media release on their 2015
funeral insurance report that shows how sharply premiums rise for
people over 50 and the types of funeral policies that have high
cancellation rates.

What to consider before
you buy funeral insurance

Before you buy funeral insurance you need to check if it is
worth the money:

Weighing up costs and other options - Will you
be paying more for the insurance than the funeral will actually
cost? Have you considered other options you might have for paying
for a funeral?

Keeping up with premium increases - When your
premiums increase, will you be able to keep paying them?

Think long term and remember, if you can't keep up with the
payments you are likely to lose all the money you have paid towards
the insurance.

How fast will your insurance premium rise?

Your insurance premiums will go up over time. The PDS will tell
you if your cover will increase by the Consumer Price Index (CPI)
or by a predetermined amount - which means your premium will rise
to cover the larger amount of cover.

If you don't want your cover to increase you can usually opt out
of this, but you must contact your funeral insurance provider.
Always check the PDS for these details.

Case study: Alice gets funeral insurance

Alice was 58 and still working when she took out funeral
insurance costing $20 per fortnight. She wanted funeral cover so
her family did not have to worry about paying for her funeral.

By the time Alice was 71, her premium had doubled and cost her
more than $40 per fortnight. It had gone up every year as she aged
and to cover inflation.

She struggled to pay the higher premium on her much lower,
post-retirement income. She also knew it would continue to go up
each year.

Alice added up all the premiums she had paid over the last 13
years and worked out that they had cost her more than $10,000.

What is
'Expenses only' funeral insurance

'Expenses only' funeral insurance means your family only get a
payout for the actual cost of your funeral. Like other funeral
insurance, you still make regular payments that will increase over
time.

These types of funeral plans:

Only cover funeral expenses - You may need to
prove the funeral costs with receipt.

Can be sold door-to-door - Don't sign up on
the spot if someone is selling you this product at your door. Take
the brochures and have a think about it.

Offer you less protection - Laws that protect
consumers and their money when buying funeral insurance may not
apply to 'expenses only' plans.

Offer you less coverage - Exclusions may
apply.

Should you buy funeral
insurance?

There are pros and cons to buying funeral insurance. Here are
some key facts to help you decide if it's right for you.

Pros

Immediate cover with exclusions - You can get
cover from day one but most policies only cover accidental death in
the first year or two.

Helps people who struggle to save - It may
suit you if you aren't sure if you can save for funeral costs.

Cons

Increasing premiums - Premiums generally go up
over time. This means what starts out as a cheap way to pay funeral
costs can become very expensive, especially if you are living on a
fixed income.

No refund on premiums you've paid - If you
can't afford to keep up the premiums or want to cancel your policy,
you probably won't get back the premiums you have paid.

Your premiums could cost you more than your
funeral - If you live another 5 to 10 years you may end up
paying more in premiums that the cost of the funeral. Visit the My Longevity website to work out
your life expectancy.

Exlcusions apply in the first few years - As
most insurers only cover accidental death in the first 2 years, if
you die from a terminal illness in this time you may not be
covered. Check the policy's terms and conditions.

You don't get the money right away - Sometimes
it can take a while for your family to receive the insurance payout
to cover funeral costs.

Other ways to cover funeral
costs

If you want to make things easier for your family by paying for
your funeral in advance, there are other ways to do this. You could
think about getting a pre-paid funeral, a funeral bond, using your
superannuation or even saving up for your funeral in a separate
high interest savings account. See paying for your funeral for
more information on all your options.

If you decide funeral insurance is right for
you, shop around and get a few funeral insurance quotes. Then
you'll be able to get the best value for money as policies differ
between insurers. Make sure you feel comfortable paying the rising
premiums over time.